By Ray Birch
CHICAGO—While the expected Federal Reserve rate cut today won’t be a big bottom-line boost to most consumers, credit unions should be positioning themselves for the spike in consumer confidence any cuts will bring, says TransUnion.
TransUnion’s Q2 Quarterly Credit Industry Insights Report shows average credit card balances for consumers rose to $6,329, compared to $5,947 one year ago. However, bank card originations were down 7% year-over-year in Q1 2024. While mortgages saw their first originations growth since 2021, average monthly auto payments declined slightly.
“There continues to be consumer demand for credit. We see balances continue to grow,” said Charlie Wise, head of global research at TransUnion. “Even if consumers aren't opening new cards, they continue to use the cards they have and build balances. That's clearly a sign consumers are viewing credit as something that is important to them. In some cases, they splurge on summer travel, or back-to-school shopping. In some cases, it’s just literally day-to-day making ends meet.”
Wise said data show continued growth in unsecured personal loans, typically being used for debt consolidation and paying off higher credit card balances.
“In other cases, some are using credit for large-ticket purchases, like a home renovation, or to fund a large wedding or expenditure,” Wise said.
Secured Lending Growth
TransUnion has not seen the same level of growth on the secured lending side—auto and mortgage.
“But a lot of that pressure has to do with the much higher interest rates, the higher cost of borrowing,” Wise explained. “That's causing a lot of consumers to essentially wait it out until they get some signs that rates are going to start coming back down. We're pretty confident there's going to be a fair amount of demand, as consumers look to get back into the auto and mortgage markets as interest rate relief gives them more confidence in making those deferred home purchases or replacing their vehicles.”
What might lenders see when rates are reduced?
“I would say there may be a confidence that comes to consumers when we start seeing rate cuts that may be larger than the actual benefits they get from those cuts,” Wise said. “The reality is if we see a rate a cut in September, be it 25 or 50 basis points, that's not going to make a huge dent in terms of borrowing costs, given that rates have gone up 500 basis points. So, a 25- or even 50-basis point cut is not going to make a huge dent.”
But it's going to give consumers confidence that more rate reductions are coming, Wise said.
“Consumers may say, ‘I don't feel comfortable taking out of 6 .5% mortgage today, but I'm pretty confident I'll be able to get a mortgage in three to six months,’” Wise said.
Big Opportunity For Lenders
The same momentum will occur within auto lending, Wise added.
“If rates come back down there's a lot of opportunity for consumers to refinance those higher-cost auto loans at a cheaper interest rate. That's something that will be a real opportunity for many lenders, particularly credit unions,” Wise said.
What should credit unions be thinking about and doing now?
“There continues to be a lot of pent-up demand for vehicle purchases, and I think we've seen dealer seen inventories start to improve,” Wise said. “We have seen new auto prices, if not come down, certainly stabilize. Now, consumers have a little more room to negotiate with auto dealers these days, which they didn't have one and two years ago. And there's a lot of consumers who are driving vehicles that are very much in need of replacement.”
Wise said it’s time for credit unions to market to their members.
“Let them know that if they are in the market to purchase a new vehicle the credit union has low rates and offers pre-approval,” he said. “Let them know they can walk into dealerships and be confident in what they can afford. Get your members pre-approved.”
Wise added that delinquencies have been rising, particularly with credit cards and on auto loans—even on mortgage loans.
“However, it’s not alarming,” Wise said. “Consumers are still struggling with the higher prices that they've seen over the last several years. The residual impacts of inflation will be with us for quite a while, and there are consumers who are struggling, carrying these higher balances and carrying them at higher interest rates. Now is the time for them to seek a trusted advisor at a credit union—talk about things they can do to free up some cash flow and give themselves more breathing room.”